Affordable groceries in the supermarket despite inflation: suspend VAT and strengthen competition

_ Yuri Kofner, economist, MIWI Institute. Munich, 12 May 2022.

In April 2022, headline inflation in Germany reached 7.4 percent – a historic high since the 1980s. Food prices rose by 8.6 percent year-on-year, especially meat products by 11.8 percent and cooking oil by as much as 27.3 percent.[1]

This increase in food prices is particularly regressive, as it hits poorer households hardest, who spend more of their income on food, energy, transport and rent.[2] By 2021, the share of spending on food in consumer spending by domestic households had risen by a sixth compared to 2016 and amounted to 15.4 percent.[3]

This increase in food prices has two main reasons: First, it is based on the increased costs of natural gas (207 percent in March 2022 year-on-year), fuel (57 percent), fertilizer (87 percent) and animal feed (46 percent)[4] – both due to external (war in Ukraine, supply bottlenecks) and domestic economic factors (expansionary monetary policy, high climate and energy taxes, corona restrictions).

Second, the lack of competition in the grocery retail market could allow for excess profits. In 2020, food retailing in Germany was an oligopoly, dominated by four supermarket chains that collectively control 67 percent of the industry.[5]

In order to shield Bavarian and German households against this surge in inflation with immediate effect and to guarantee all citizens access to affordable food, two measures are therefore necessary: First, the sales tax on staple foods must be temporarily reduced to 0 percent.

In order to protect German households against this surge in inflation with immediate effect and to guarantee all citizens access to affordable food, two measures would be necessary: First, the sales tax on staple foods should be temporarily reduced to 0 percent.

This demand is supported, among others, by the social association VdK, the Federal Association of Consumers (vzbv) and the German Diabetes Society, the German Institute for Economic Research (DIW).[6] According to a recent survey, 77 percent of citizens would support a temporary suspension of VAT on groceries.

It should be noted that due to a change in the EU VAT system directive from April 2022, it is now possible in principle to reduce VAT to 15 percent, reduced VAT to 5 percent and to generally exempt groceries from VAT.[7]

Research by the Ifo Institute shows that the reduction in the VAT rate in 2020 resulted in a price drop in retail supermarkets of around 1.3 percent, meaning around 70 percent of the tax cut was passed on to consumers.[8]

The Federal Statistical Office estimates that the 2020 sales tax cut reduced inflation by 160 basis points.[9]

Secondly, it must be examined whether the ordoliberal market economy framework conditions are still observed in the food retail trade and whether the large retail chains are not abusing their oligopolistic market power.

Notes

[1] Destatis (2022). Inflationsrate im April 2022 bei +7,4%. URL: https://www.destatis.de/DE/Presse/Pressemitteilungen/2022/05/PD22_196_611.html

[2] IW Köln (2022). Haushalte vom Preisanstieg unterschiedlich stark betroffen. URL: https://www.iwd.de/artikel/haushalte-vom-preisanstieg-unterschiedlich-stark-betroffen-532167/

[3] Destatis (2022). Anteil der Ausgaben der privaten Haushalte in Deutschland für Nahrungsmittel, Getränke und Tabakwaren an den Konsumausgaben in den Jahren 1850 bis 2021. URL: https://de.statista.com/statistik/daten/studie/75719/umfrage/ausgaben-fuer-nahrungsmittelin-deutschland-seit-1900/

[4] Destatis (2022). Erzeugerpreise März 2022: +30,9 % gegenüber März 2021. URL: https://www.destatis.de/DE/Presse/Pressemitteilungen/2022/04/PD22_172_61241.html

[5] BVE (2021). Marktanteile der führenden Unternehmen im Lebensmittelhandel in Deutschland in den Jahren 2009 bis 2020. Jahresbericht 2021. URL: https://de.statista.com/statistik/daten/studie/4916/umfrage/marktanteile-der-5-groessten-lebensmitteleinzelhaendler/

[6] Bach S. (2011). Volle Mehrwertsteuer auf Nahrungsmittel belastet vor allem Geringverdiener. DIW. URL: https://www.diw.de/documents/publikationen/73/diw_01.c.371848.de/11-16-1.pdf

[7] FAZ (2022). Werden Lebensmittel wegen der Inflation von der Mehrwertsteuer befreit? URL: https://www.faz.net/aktuell/wirtschaft/inflation-keine-mehrwertsteuerbei-lebensmitteln-gefordert-17972004.html

[8] Fuest C. (2022). The Pass-Through of Temporary VAT Rate Cuts in German Supermarket Retail. ifo Institute. URL: https://www.ifo.de/DocDL/wp-2020-341-fuest-neumeier-stoehlker-temporary-vatrate-cuts.pdf

[9] Egner U. (2021). Senkung der Mehrwertsteuersätze im Zuge der Corona-Pandemie – wie wirkte sie auf die Inflation? Destatis. URL: https://www.destatis.de/DE/Methoden/WISTA-Wirtschaft-und-Statistik/2021/03/senkungmehrwertsteuersaetze-corona-pandemie-032021.pdf?__blob=publicationFile

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